Question Two Fletcher Plc's capital employed is 200 million. Management are now considering the budget for next year. Total fixed costs for this year are 50 million. Fletcher's contribution to sales ratio is 40%. The company's present target return on capital employed is 15%. Unit selling prices are 100 and it is expected that actual sales next year will meet this target. However, the new target return on capital employed for next year will be 20%. There have been a number of proposals put forward by different managers in order to increase the return on capital employed. 1. The Production Manager thinks that cheaper components could be used thereby reducing the direct material cost by 12. Part of this saving could be passed on to the customer by reducing the selling price by 10%. This change in selling price is expected to increase the sales volume by 5%. 2. The Sales Manager estimates that an extra 5 million spent on advertising will increase sales by 10%. 3. The manager of the maintenance department suggests replacing the present machinery at a cost of 8 million. This will reduce the direct labour cost by 8 per unit. Present selling price will not be changed. 4. The Marketing manager has been approached by a charity who wishes to purchase an extra 200,000 units next year as a special one-off order. However, the charity is only willing to pay 70 per unit. Assume the company has the spare capacity available to manufacture the extra 200,000 units. 5. The Chairman proposes to raise the selling price by 8% but it is expected that 5% of sale lume will be lost, even after an extra 5 million is spent on advertising. Required: a) Calculate the company's break even point in units and sales revenue based on the budget before any of the proposals are taken into account. b) Calculate the level of output necessary to reach a target return of 15%. c) Evaluate each proposal separately. d) Discuss whether the new target return on capital employed can be achieved and any other factors, which need to be taken into account. e) Explain how a company's split of fixed and variable costs can be found using the high-low method. Compare the usefulness of this method in comparison to regression analysis